Bac Home Loans Servicing, LP v. Fulbright

• Decision Date: 26 June 2014
• Docket Number: No. 88853–1.,88853–1.
• Court: Washington Supreme Court
• Parties: BAC HOME LOANS SERVICING, LP, a foreign limited partnership, Petitioner, v. Michael FULBRIGHT and Jane Doe Fulbright, individually and the marital community comprised thereof, Respondents.

180 Wash.2d 754

328 P.3d 895

BAC HOME LOANS SERVICING, LP, a foreign limited partnership, Petitioner,

v.Michael FULBRIGHT and Jane Doe Fulbright, individually and the marital community comprised thereof, Respondents.

No. 88853–1.

Supreme Court of Washington,

En Banc.

June 26, 2014.

Brian S. Sommer, Steven K. Linkon, Routh Crabtree Olsen PS, Bellevue, WA, Douglas E. Winter, Bryan Cave LLP, Washington, DC, for Petitioner.

Michael Gene Fulbright, Attorney at Law, Bellevue, WA, for Respondent.

Douglas J. Smart, Graham & Dunn PC, Seattle, WA, Amicus Curiae on behalf of American College of Mortgage Attorneys.

C. JOHNSON, J.

¶ 1 This case concerns the interplay between Washington's Condominium Act, chapter 64.34 RCW, redemption statute, chapter 6.23 RCW, and recording act, chapter 65.08 RCW. Jeanne Lewis purchased a condominium with a $277,000 loan from Bank of America. The condominium association recorded its declaration in 2006. Bank of America recorded its deed of trust in 2007. Lewis defaulted on her condominium assessments in 2008. In 2009, the condominium association initiated a judicial foreclosure proceeding under chapter 64.34 RCW. Michael Fulbright bought the condominium at the trustee's sale for less than $15,000, which under the statute would extinguish Bank of America's lien. Bank of America attempted to redeem the condominium under the redemption statute, RCW 6.23.010. Because Bank of America recorded its deed of trust before Lewis defaulted on her assessments, the trial court and Court of Appeals held that Bank of America did not record its mortgage “subsequent in time” to the condominium's lien and therefore under RCW 6.23.010, Bank of America did not have a statutory right of redemption. We reverse the Court of Appeals.

Facts and Procedural History

¶ 2 On December 20, 2006, the Tanglewood Condominium Association at Klahanie in Issaquah (Association) recorded its declaration.¹ On March 6, 2007, Lewis purchased a Tanglewood condominium with a $277,000 loan from Bank of America. She signed a promissory note secured by a deed of trust on the condominium that named Bank of America as beneficiary.² Bank of America recorded its deed of trust on March 9, 2007.³ In May 2008, Lewis defaulted on her monthly condominium assessments.⁴ In January 2009, the Association initiated a judicial foreclosure proceeding. Bank of America and Lewis were named as defendants and served a copy of the complaint. Because of an internal error, Bank of America did not appear. On June 24, 2009, the superior court entered a default judgment and foreclosure decree against Lewis and Bank of America.

¶ 3 On May 7, 2010, Fulbright bought Lewis's condominium at the sheriff's sale for $14,481.83—the total of unpaid assessments plus $100. On April 29, 2011, Bank of America sought to redeem the property under RCW 6.23.010. At the time, under the redemption statute, the right to redemption applied to creditors having a lien “subsequent in time” to the foreclosing lien. Fulbright objected, claiming that Bank of America was not a qualified redemptioner because its deed of trust was recorded before Lewis defaulted on her assessments and the Association brought this action. On May 6, 2011, before the one-year redemption period expired, Bank of America tendered the estimated redemption amount and brought this action against Fulbright, seeking a declaratory judgment that Bank of America was an authorized redemptioner under Washington law. Fulbright filed an answer and counterclaim, seeking to quiet title to the property in his favor.

¶ 4 The trial court denied Bank of America's motion and quieted title in favor of Fulbright. The Court of Appeals affirmed,⁵ relying on its then-recently amended decision in Summerhill Village Homeowners Ass'n v. Roughley, 166 Wash.App. 625, 270 P.3d 639, 289 P.3d 645 (2012), where it held that a mortgagee may not redeem a condominium unit foreclosed upon for unpaid assessments that became due after the deed of trust was recorded.

¶ 5 On July 28, 2013, Senate Bill (SB) 5541 went into effect. That legislation, passed in direct response to Summerhill, amended RCW 6.23.010 by providing that the right to redemption applies to all lienholders “subsequent in priority” to the foreclosing lien. Laws of 2013, ch. 53, § 1(1)(b). Bank of America petitioned this court for review, claiming that its deed of trust was “subsequent in time” and, in the alternative, that SB 5541 should be applied retroactively. We granted the petition for review in its entirety. BAC Home Loans Servicing, LP v. Fulbright, 178 Wash.2d 1001, 308 P.3d 642 (2013). The American College of Mortgage Attorneys filed an amicus memorandum in this case in support of Bank of America.

Analysis

¶ 6 The common law doctrine of lien priority was “first in time, first in right.” Under the common law doctrine, an interest created prior in time took priority over any subsequent competing interest. This rule was universally clarified, and now every state has some form of statutory recording system. The purpose and effect of a recording act is to reverse the order of priorities in certain cases. 18 William B. Stoebuck & John W. Weaver, Washington Practice: Real Estate: Transactions § 14.5, at 126–29 (2d ed.2004). Washington has a “race-notice” type of recording system, which was enacted initially in 1854. SeeLaws of 1854, § 4, at 403. Now codified under RCW 65.08.070, the recording act provides that the deed or interest first recorded is superior to any outstanding unrecorded conveyance of the same property unless the later mortgagee or purchaser had actual knowledge of the prior unrecorded interest.⁶

¶ 7 To illustrate the operative effect of Washington's recording act, we can look at a simple example. Suppose Bank A obtained a lien—i.e., executed, acknowledged, and delivered a loan—on day one. Bank B obtained a lien on the same property on day two. Without any other action, Bank B's lien is subsequent in time and subsequent in priority to Bank A's lien. This is consistent with the common law theory of liens, “first in time, first in right.” After enactment of the recording act, whichever bank records first will have priority. In other words, if Bank A records its lien on day three and Bank B records its lien on day four, Bank A will have priority because it obtained its lien first temporally and, more importantly, because it recorded first. Changing the facts, if on day three Bank B recorded its lien without knowledge of Bank A's lien and Bank A did not record its lien until day four, Bank B would have priority over Bank A. “Time” therefore, under the recording act, centers generally on the recording date, which, as the example illustrates, could result in the reordering of priorities.

¶ 8 In 1899 the legislature enacted a redemption statute granting property owners and lienholders the statutory right to redeem real property when a foreclosure of a higher priority interest would act to extinguish their interests in that property. Laws of 1899, ch. 53, § 7, at 89. Priority of interests were decided by date of recording pursuant to the recording statute and not by the date the interest was created. Before the legislature amended the redemption statute in 2013, real property could be redeemed by “[a] creditor having a lien by judgment, decree, deed of trust, or mortgage, on any portion of the property, or any portion of any part thereof, separately sold, subsequent in time to that on which the property was sold.” Former RCW 6.23.010(1)(b) (1987) (emphasis added).⁷ Since 1899 the Washington legislature has revised the redemption statute only twice. In 1987, the legislature codified our holding in Rustad Heating & Plumbing Co. v. Waldt, 91 Wash.2d 372, 376, 588 P.2d 1153 (1979) (holding that a deed of trust is a “mortgage” under the statute) by expanding the definition of “redemptioner” to include deed of trust beneficiaries and successors in interest. Then, in 2013, after the Court of Appeals' opinions, the legislature amended the redemption statute. Now, the statute reads that a redemptioner includes any claimant having a lien “subsequent in priority” instead of “subsequent in time” to the foreclosing lien. RCW 6.23.010(1)(b).

¶ 9 Generally, statutory redemption arises when a senior lienholder ⁸ forecloses on the property, thereby extinguishing any junior liens. After the foreclosure sale, statutory redemption gives junior lienholders a grace period beyond the sale to salvage something—i.e., the junior lienholder can “redeem the land” by purchasing the land at the sale price, with interest and taxes, from the purchaser. “[T]he idea is that only one whose title or lien has been extinguished may have ‘another bite of the apple.’ ” 27 Marjorie Dick Rombauer, Washington Practice: Creditors' Remedies—Debtors' Relief § 3.19(b), at 163 (1998). Generally, under the statute, the redemptioner may redeem the property within one year after the date of the sale. RCW 6.23.020.

¶ 10 Looking at our earlier example and applying the redemption statute, if Bank A obtains and records its lien on day one and Bank B obtains and records its lien on day two, Bank A will be the senior Henholder and Bank B's interest in the land will be junior to Bank A's interest. In this case, Bank B would be a valid redemptioner because its lien was recorded subsequent in time to Bank A's and because its interest in the land will be extinguished if Bank A forecloses on the land. Changing the facts, as mentioned above, if Bank B recorded before Bank A recorded its interest in the property, Bank B would have priority over Bank A. Bank A would be the junior Henholder and a valid redemptioner even though Bank A temporally obtained its lien first. This is how the recording act and the redemption statute operate.

¶ 11 Enacted almost 100 years later, the Condominium Act is a somewhat complicated exception to the recording act. RCW 64.34.364 provides,

(1) The association has a lien on a unit for any...